In his NYT column that I read in the Sacramento Bee today, Tuesday, May 31, 2011, economist Paul Krugman writes that we could “cut back joblessness”: 1) by employing FDR’s “WPA-type programs putting the unemployed to work doing useful things like repairing roads.” We have the money for repairing roads and some of the 2009 Recovery Act’s $782 billion went to the states to repair roads and bridges. How many jobs were created? Not as much as the money appropriated would indicate. Most of the road and bridge projects were already planned by the states; only the source of funding changed. 2) “We could have a serious program of mortgage modifications, reducing the debts of troubled homeowners.” That is exactly what the Obama government has been doing, spending a lot of money and hardly making an impact on the problem. 3) “We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.” During the past 12 months the Consumers Price Index increased to 3.2 percent,

A worse set of recommendations can hardly be imagined. Inflation is not likely create much employment. All it will do is create economic distortions. Leading economists like Obama’s Harvard professor Lawrence Summers, who was his chief economist, Prof. Christina Romer, his chief of the Council of Economic Advisers and one of the authors of the Recovery Act of 2009, must have given the president similar advice. So Krugman is only saying, “Do more of the same” i.e., another economic stimulus plan that will widen the enormous budget deficit and create a trillion more of debt. The Tea Party supporters may not be economists but their instincts tell them that widening the budget deficit is no solution at all.

President Obama is testing out the theory that it is possible to pump up the U.S. economic tire without patching the trade deficit leak. So far, he has only succeeded in pumping up the trade deficit.

As shown in the chart above, the U.S. trade balance fell to an annual rate of a negative $571 billion in the first quarter of 2011, the worst level since President Obama took office. This worsening of the trade deficit subtracted from demand for U.S. products, driving down real U.S. GDP growth from 3.1% in the fourth quarter of 2010 to an anemic 1.8% in the first quarter of 2011, according to the BEA's second estimate of 1st Quarter U.S. GDP released on May 26....

In a special election in the NY 26th House District, the Democratic candidate just won what was formerly a "safe" Republican seat. The Republicans were split, with some of the Republican vote going to a self-proclaimed "Tea Party" candidate. Nevertheless, the election showed that the Republican Party has fallen drastically since November 2010, just 7 months ago, when they won the House in an overwhelming landslide.

Back then, they campaigned as the party that would balance the budget and oppose Obamacare's Medicare cuts. Once they won the election they morphed into the party that wanted tax cuts for the rich and cuts in Medicare.

They started to go awry during the lame duck session when they negotiated a continuation of the Bush tax cuts as well as new Social Security Tax cuts with the Obama administration, making an already bad budget situation even worse.

Then, this session, Rep. Paul Ryan, the Republican chair of the House Budget Committee, put together a budget plan, approved in principle by the House Republicans, that didn't balance the budget. Instead it cut taxes for the rich from 35% to 25% and cut Medicare 10 years down the road, not helping at all with the 2012 budget....

Like every other goal, increased expenditures on the environment are subject to the economic law of diminishing returns. The first billion makes an enormous contribution to a better environment. The second may make an even greater contribution\ but eventually additional billions make a lesser and lesser or no contribution at all. For the past half decade, our government has wasted hundreds of billions of dollar on environmental programs that for all practical purposes have yielded no benefits at all and created practically zero sustainable jobs. Meanwhile the waste of resources has been dramatized by our failure to do anything to control hurricanes and tornados like the one that inflicted enormous losses to lives and property in Joplin, Missouri. Even if it turns out that carbon emissions have contributed to global warming, it is not clear that global warming has more costs than benefits.

Our citizens have embraced the anthropogenic theory of global warming and have already spent billions on trying, without success, to reduce carbon emissions in the atmosphere. We have spent hundreds of billions of dollars as a nation and succeeded only in reducing the living standards of the American workers.

And while its proponents claim the theory is settled, hundreds of scientists are on record as saying the theory is wrong. They allege that 50 years of global warming is correlated with increased carbon emissions but, as every statistician knows, correlation is not proof that carbon emissions are the cause of global warming, especially when the data is confined to about 50 years. How are periods of global warming and cooling during the past millennium to be explained? Moreover, the proponents have no idea why the past decade has been one of global cooling. A British scientist who correctly predicted the cold winters this year and last has been quoted as saying that we are at the beginning of a period of global cooling. ...

Peter Navarro is one of our country's foremost economists, and he happens to agree with us! I'll get my father to review his new book with Greg Autry, Death by China: It's Not China Bashing if it's True, as soon as we get a copy. One chapter is online now and it looks like it is well worth reading. Here is a selection:

On this economic front, China's perverse brand of Communist-style "State Capitalism" has totally shredded the principles of both free markets and free trade. In their stead, China's state-backed "national champions" have deployed a potent mix of mercantilist and protectionist weapons to pick off America's industries job by job and one by one.

China's "weapons of job destruction" include massive illegal export subsidies, the rampant counterfeiting of U.S. intellectual property, pitifully lax environmental protections, and the pervasive use of slave labor. The centerpiece of Chinese mercantilism is, however, a shamelessly manipulated currency that heavily taxes U.S. manufacturers, extravagantly stimulates Chinese exports, and has led to a ticking time bomb U.S.–China trade deficit close to a billion dollars a day.

Meanwhile, the "entry fee" for any American company wishing to scale China's "Great Walls of protectionism" and sell into local markets is not just to surrender its technology to Chinese partners. American companies must also move research and development facilities to China, thereby exporting the "mother's milk" of future U.S. job creation to a hostile competitor....

On May 13, the United States and China concluded the third meeting of the U.S.-China Strategic & Economic Dialogue. A joint factsheet about the meeting, which appears on the Chinese Ministry of Foreign Affairs website, lists the terms of the agreement. In return for a some concessions, mainly to those American businesses that already market to China from China, the Obama administration gave the Chinese government a free pass to continue their currency manipulations. Here is the relevant section of the agreement:

In accordance with economic recovery in the United States, the Federal Reserve will continue to adjust its monetary policy as appropriate to promote sustainable economic growth and price stability. The People's Bank of China will continue to adopt a mix of monetary policy tools to implement prudent monetary policy, in order to promote growth sustainability and price stability. The United States will maintain vigilance against excess volatility in exchange rates, and China will continue to promote RMB exchange rate flexibility....

Nouriel Roubini, one of the few economists who predicted the new depression and understands it, argues that China's exchange rate policy is keeping the U.S., U.K., and some other advanced economies from recovering their economies through net export growth (i.e., reduction of their trade deficits). During a Bloomberg interview with Tom Keene at the Milikin Conference at the beginning of this month, Roubini said (about 5:20 in the video):

In this fundamental exchange rate game, the currencies that should be appreciating are those that are undervalued with large current account surpluses [i.e., trade surpluses]. While the ones that should be depreciating are U.S., U.K. and other countries that had their bubble, then bust, and now need net export growth, given that domestic demand is anemic with balance sheet retrenchment.

The problem is that China is resisting its currency from appreciation, is doing it very, very gradually. China is shadowing the U.S. dollar and that every other emerging market in the world, not just in Asia but those in Latin America, they say, "If China resists appreciation of its currency, I don't want to lose market shares to China in third markets, and I don't want a flood of cheap Chinese goods destroying my own import-competing sectors."

So all of these countries are shadowing China. So the adjustment of exchange rates that should occur, yuan currency appreciating, advanced economies weakening relative to the yuan, so that we have global rebalancing, that is not occurring....

Although it is fashionable to fear inflation (and inflation is very bad for those who have saved money in bonds, CDs, or other inflation-vulnerable instruments) there are strong advantages to continuing a monetary policy that will cause inflation. Indeed, in the absence of an effective policy response to our problems, inflation may be the next best thing.

In the last year or two there has been increased attention paid to the budget deficit. However, most of the plans that have been proposed so far are remarkably weak. Debt reduction is not in the plans. Not in the Ryan plan, not in the Bipartisan Deficit Reduction Commission plan, not in the President’s plan. The graph below shows projected debt held by the “public” (by which is meant both ordinary citizens and foreign central banks) under the Ryan plan over the next ten years as projected by Ryan's plan itself. Note that the line increases pretty steadily throughout the ten years. Thus, even with all of the smoke, mirrors, and optimistic assumptions in this and all deficit reduction plans, it clearly does next to nothing to tackle the debt, except to the extent that inflation and economic growth may reduce its weight.

Obama has instructed the Department of Interior to conduct annual lease sales in Alaska’s National Petroleum Reserve. He also ordered a “speeding up” of evaluations of oil and gas reserves in the Mid- and South-Atlantic Ocean.

Also part of the plan is opening new leases in the Gulf of Mexico and providing incentives for oil companies to develop their unused leases “both on and offshore.”

Obama said that oil companies will now have more time to meet higher safety standards, and he is extending drilling leases in the Gulf of Mexico that were impacted by the moratorium imposed by the Obama administration following the 2010 DeepWater Horizon oil spill.

His statement does not address the steps taken by his administration to stifle natural gas and coal production, just oil. He is saying that "oil companies will now have time to meet higher safety standards."...

According to the latest inflation data published today by the Bureau of Labor Statistics, the rise in consumer prices accelerated rapidly for the third month in a row from 2.68% in March to 3.16% in April, as shown in the graph below.

Some commentators are encouraged by these numbers. Reuters reports: "The pace of food and fuel price rises slowed considerably from March, suggesting inflation pressures may be peaking."

This can be seen by comparing the rise in the inflation rate from February to March of 0.57% with the rise in the inflation rate from March to April of 0.48%, as shown by the line getting less steep from March to April in the graph. If this decelleration would continue, then inflation would peak at 4.2% in September, and thereafter fall back downwards.

Alternatively, it is possible to look at the line from January to April as representing a continuous straight line in which inflation is climbing at about a .5% rate per month. If this straight line would continue, inflation would climb to about 7% in December....

Here are some of the graphs that accompanied our commentary. This one compares the price at the pump for Compressed Natural Gas and Gasoline:

This one shows why natural gas has been coming down in price, relative to oil. It shows how proven U.S. reserves for natural gas and oil compare:

Our point was that if the U.S. govenrment purchased only CNG new vehicles, that would save the government about $1.60 per gallon at the pump and at the same time cause CNG filling stations to pop up all over the country making it possible for consumers and businesses to switch.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced last Wednesday that total March exports of $172.7 billion and imports of $220.8 billion resulted in a goods and services deficit of $48.2 billion, up from $45.4 billion in February. March exports were $7.7 billion more than February exports of $165.0 billion but March imports were $10.4 billion. The trade deficit has the effect of reducing our Gross Domestic Product in March by $48.2 billion and represents a drag on employment of 482,000 workers.

The Pollyannas in Washington and New York greeted the data by saying and writing that increased exports and increased exports mean jobs. None of them said that imports increased even faster and that increased imports means a loss of jobs.

For the three months ending in March, exports of goods and services averaged $168.4 billion, while imports of goods and services averaged $215.3 billion, resulting in an average trade deficit of $46.9 billion, a drag on employment of 469,000 jobs. If the trade deficit is extrapolated to the remainder of the year, we can expect that the trade deficit for 2011 will be in the neighborhood of $562.8 billion, a drag on employment of 5.6 million jobs.

In February and March, 2011, the following group of selected countries recorded trade deficits as indicated, in billions of dollars. In the third column, we estimate the 2011 trade deficit based on the numbers in the first two columns. In the fourth column, we estimate the number of jobs that would be created if trade were balanced at the level of imports from each.

Trade Deficit and Loss of Jobs

Country

March(billions)

February(billions)

Annual Deficit(billions)

Lost Jobs

China

$18.1

$18.0

$216.6

2,160,000

OPEC

$10.8

$9.4

$121.2

1,212,000

Germany

$4.6

$3.3

$47.4

474,000

Mexico

$6.2

$5.3

$69.0

690,000

Japan

$6.1

$5.2

$67.8

678,000

Venezuela

$3.0

$2.1

$30.6

306,000

If trade were to be balanced, it would create up to 5.52 million jobs mostly in manufacturing, arresting the deindustrialization of the U.S. and restoring the labor force to full employment....

Nearly three-quarters (74.5 percent) of homes in the United States lost value from Q1 2010 to Q1 2011. That’s up from Q4 2010, when 69.2 percent had lost value, but is down substantially from a peak of 85.5 percent in Q1 2009.

A record (37.7 percent) number of homes sold in March were sold for a loss. The rate of homes selling for a loss has steadily increased since June 2010.

Negative equity in the first quarter reached new high with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4....

Bernanke's expansion of money supply to buy treasuries (QE2) was supposed to build up aggregate demand. It indeed helped bring GDP above 3% and unemployment below 9%, but those gains did not last. We're left with a collapsing dollar and surging inflation instead of lasting growth.

Bernanke's failure immediately followed Obama's failure. Obama tried expanding government spending to build up aggregate demand. His stimulus almost produced a "summer of recovery" in the second quarter of 2009, but a surging trade deficit took away all of his momentum. We're left with a huge and growing government debt instead of lasting growth....

Most economists think that the weaker dollar will revive American exports. The sequence of events they hypothesize is the following: weaker dollar -> higher profits -> investment in new factories -> greater exports. There is no way to get much greater exports without increased investment in new highly-efficient modern factories.

The weaker dollar does indeed lead to higher profits, but the higher profits don't lead to much investment in new factories. That's because investments are based upon long-term considerations, and manufacturers don't see the weak dollar as being a long-term change. They expect that the exchange rate will bounce up again as it has been doing. The chart below, shows how the dollar's price has yo-yo'd up and down versus the euro for the past five years:

Congressman Ryan's plan is an excellent plan, but it could still be improved. We would suggest the following four additions:

1. Cut Discretionary Spending. The weakest aspect of the Ryan plan is that it does not actually balance the federal government budget. According to a preliminary CBO scoring of the plan, the federal government's budget deficit, which was 9% of GDP in 2010, would still be an enormous 2% of GDP in 2022. House Republicans could cut the budget much further by borrowing from Republican Senator Rand Paul's excellent budget plan. Among the largest items Senator Paul would cut are $78 billion by eliminating the Education Department and most of its functions, $53 billion by eliminating Housing and Urban Development and most of its functions, $44 billion by eliminating the Energy Department and most of its functions, and $43 billion from the Transportation Department, partly by defunding Amtrak.

2. Changing to Rollover Capital Gains Tax. The Ryan plan intends to end tax loopholes for the rich, but it misses the largest loophole of them all, the top 15% tax rate on capital gains. The problem is that income is fungible and can be converted from one form to another. For example, many corporations give their top executives stock option bonuses and then buy back their own stock (consuming their own capital) to drive up the price. Their executives sell the options at a profit, only having to pay a 15% tax on the capital gain, whereas they would have had to pay a 35% tax on a straightforward bonus.

Capital gains taxes are low for a good reason -- to prevent the government from removing income producing capital from the private sector. However, taxing capital gains at a rate lower than other income is taxed has a bad side effect -- encouraging the consumption of capital. The solution is simple: raise the capital gains tax rate to the same rate that other income is taxed, but switch to the rollover treatment, which only charges the capital gains tax when capital is consumed. When people sell one asset to buy another, the capital gains tax would be deferred until the new asset is sold (i.e., the capital gain would be rolled over into the new asset).

3. Switch Transportation to Compressed Natural Gas. New discoveries of natural gas show that the United States could become completely independent of foreign oil if we switched many of our vehicles from gasoline and diesel fuel to compressed natural gas (CNG). CNG is already much less expensive than gasoline and will become an even better buy in the future. The main problem preventing its use is the lack of CNG filling stations. This lack would be remedied quickly if all public vehicular transportation switched to CNG.

4. Add a Scaled Tariff, (our invention!) to balance trade with countries with which we are experience large chronic trade deficits. Such a tariff would apply to those countries with whom we have been experiencing chronic deficits, including China, Germany and Japan, but would not apply to countries such as Canada or Brazil, with whom our trade is balanced. Moreover, it would be perfectly legal under World Trade Organization (WTO) rules that allow countries experiencing chronic trade deficits to impose tariffs upon those countries with which they have trade deficits. When the U.S. trade deficit with a country would go up, the duty rate would go up. When the U.S. trade deficit with a country would go down, the duty rate would go down. When trade would approach balance or go into surplus, the duty would disappear.

If the U.S. enacted a scaled tariff, the Chinese government, which currently only lets its people buy 30¢ from the U.S. for every $1 we buy from them, would likely remove its barriers that prevent its people from buying more American products. Also, American and international businesses would once again find it profitable to build factories in America. An additional benefit is that the scaled tariff would collect well over $200 billion in revenue during its first year.

At the moment, Bernanke's huge expansion of the monetary base to buy long-term US Treasury bonds (QE2) is bringing the dollar perilously close to a collapse. In fact that collapse may have already begun, as shown by the near vertical line shown at the tail end of the chart below:

Republican leaders talk as though the most important thing for us to do is to reduce expenditures and bring the budget into better balance. It is true that the current budget deficit is unsustainable. Democrats have spent over $800 billion on a foolish Recovery plan that at most kept a million government employees in their largely unproductive jobs and may have cost up to millions of jobs in the private sector. Getting control of the federal budget is indeed important but getting the vast army of unemployed back to work is much more important. And it could be done quickly. What we should be doing is:

1. Bring trade into better balance. An annual trade imbalance of $600 billion dollars means that we lost 6,000,000 jobs to other nations. Before the recession, the trade imbalance was $800 billion. Trade, both exports and imports, declined as a result of the recession but it is growing again which means we are losing more jobs. We can do something immediately that would bring trade into better balance. That something single country flexible tariffs, what we have termed scaled tariffs. Imposing the single country scaled tariffs would create a million jobs within a year and millions more as the U.S. once again becomes a place to invest in new factories. The scale tariffs would bring in a trillion dollars the first year and as trade is balanced, the ensuing economic growth would bring in billions in revenues.

2. End the prohibition of drilling for oil and gas on public lands and offshore in the Atlantic, Pacific, and the Arctic. Brazil, Russia, Norway and others have found huge unexploited reserves of oil offshore and are going full speed ahead. We have allowed our environmental extremists to veto new sources of traditional energy. Pres. Obama still has not restored deep water drilling in the Gulf of Mexico and oil drilling rigs have left for friendlier waters. Yet he is willing to guarantee loans to Brazil for deep water drilling in the Atlantic. What hypocrisy! And just to appease an irrational group to get re-elected. A million jobs within a year.

3. Go full speed ahead on developing drilling for natural gas in our abundant shale deposits. It is estimated that we have sufficient reserves of natural gas to satisfy our energy needs for a century or more. Heavy vehicles like trucks and buses as Boone Pickens has urged could be converted readily and we would need thousands of filling stations. A million jobs within a year.

4. Postpone for fifty to 100 years the construction of wind and solar energy plants which cost jobs and don’t create jobs. ...

[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

Journal of Economic Literature:

[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

Atlantic Economic Journal:

In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]